(The following statement was released by the ratings agency)
Standard & Poor’s recently revised its methodology and assumptions for rating sovereign governments.
— Consequently, we are lowering the local currency long-term rating on Vietnam to ‘BB-‘ from ‘BB’. In line with this, we are lowering our ASEAN regional scale long-term rating to ‘axBB’ from ‘axBB+’.
— We are also affirming our foreign currency sovereign credit rating on Vietnam at ‘BB-/B’, the short-term issuer credit rating at ‘B’ and our short-term ASEAN scale rating at ‘axB’.
— The negative outlook on the ratings reflects our view that Vietnam faces risks of near-term economic and financial instability.
Standard & Poor’s Ratings Services today lowered its local currency long-term sovereign credit rating on the Socialist Republic of Vietnam to ‘BB-‘ from ‘BB’, and its ASEAN scale long-term credit rating to ‘axBB’ from ‘axBB+’.
At the same time, Standard & Poor’s affirmed its ‘BB-‘ foreign currency long-term rating, ‘B’ short-term foreign and local currency ratings, and ‘axB’ ASEAN scale short-term rating. The outlook on the long-term ratings is negative. Standard & Poor’s also revised its transfer and convertibility (T&C) assessment for Vietnam to ‘BB-‘ from ‘BB’ and affirmed its recovery rating at ‘3’.
“We lowered the local currency long-term rating on Vietnam after the implementation of Standard & Poor’s revised methodology and assumptions for sovereign ratings,” said Standard & Poor’s credit analyst Kim Eng Tan. Standard & Poor’s affirmed its foreign currency long-term rating because it is unaffected by the criteria update and the sovereign’s underlying credit fundamentals have not changed.
“Under the revised methodology, we are narrowing the gaps between the local and foreign currency ratings, where these had existed, for many sovereigns. This is because we believe that governments are likely to have fewer incentives to differentiate between their local and foreign currency debt in the event of debt restructuring, given the increasing globalization of markets,” Mr. Tan said.
In accordance with our criteria for sovereign ratings, the local currency rating on Vietnam is now equal to the foreign currency rating because the Vietnamese dong’s pegged exchange rate limits its monetary policy independence and its domestic financial and capital markets are at early stages of development.
The ‘BB-‘ sovereign credit ratings on Vietnam reflect the country’s low-income economy, developing financial system, and evolving policy framework. Healthy economic growth prospects, reinforced by the government’s persistent efforts in economic restructuring, partly offset these weaknesses.
The macroeconomic volatility of recent years, amid strong lending growth, has weakened the banking sector’s resilience to a new financial or economic shock. The outflows of resident capital have reduced domestic liquidity and raised the cost of domestic funding.
“A large part of domestic credit–estimated to equal 118% of GDP at the end of 2011–are priced at nominal interest rates above 15% per annum,” Mr. Tan said. “A disinflationary environment could impair borrowers’ ability to service these loans, which we expect to reprice slowly, and thus could hurt asset quality in the banking system. That may eventually require government recapitalization of key public sector financial institutions.”
In mitigation to the above weaknesses, openness to foreign direct investment (FDI) has improved Vietnam’s economic prospects. FDI has averaged above 8% of GDP during the past four years. These foreign-invested projects should help maintain Vietnam’s trend annual real per-capita GDP growth at 5%-6%. Standard & Poor’s estimates Vietnam’s growth in 2011 at 5%.
The negative outlook on the ratings reflects our view that Vietnam faces risks of near-term economic and financial instability. We could lower the sovereign credit ratings if balance-of-payment pressures mount or fiscal contingent risks from the financial sector rise. The ratings could stabilize at the current level if we assess that the risks to financial sector stability have declined. This is likely to reflect the successful implementation of policies that lift confidence in the domestic currency and reduce private sector and public enterprise leverage.